ECB warns commercial banks of digital currencies’ impact

Commercial banks must learn to adapt to a new dynamic in the payments world where impressions are being made by cryptocurrencies and central bank digital currencies (CBDC), according to European Central Bank (ECB) policy maker Jens Weidmann. Banks urge practical considerations be taken with new payment modes.

“Partnership with regulators and central banks will be critical as we look to unlock the potential of new technologies,” said Diane Reyes, global head of liquidity and cash management, HSBC in an email.

“We are exploring the potential of Central Bank Digital Currencies to improve the efficiency of cross-border payments. Our work with the Monetary Authority of Singapore, Bank of England and Bank of Canada in this area shows that CBDCs do have potential to simplify cross-border payments, but there are practical considerations that would need to be addressed first. This is less about the technology itself, and more how it would be governed and adopted across different jurisdictions.”

In an interview with German newspaper Handelsblatt last week Weidmann urged banks to develop cheaper and faster systems for money transfers to combat alternatives such as Libra.

“I’m not always in favour of immediately calling on the state. In a market economy, it’s up to companies to develop products that meet customer demands,” he said.

According to Reyes, HSBC expects real time payments to become the norm within the next five to 10 years, while Swift gpi will maintain prevalence for international payments.

“Our clients want speed, ease and certainty over their transactions, and we are actively supporting efforts to improve existing payment systems to make them simpler and faster for clients to transfer funds,” said Reyes.

Reyes declined to comment on whether the bank considers Libra – or similar cryptos or stablecoins – as potential competitors to the bank’s payments services. According to an HSBC spokesperson however, the bank may consider embracing distributed ledger technology (DLT) in certain cases barring the trading of cryptocurrencies.

“We can see opportunities in permissioned DLT and we are collaborating with reputable partners to realise commercial benefits from DLT over the medium to long term. We will bank customers using DLT provided they meet our global compliance standards and their DLT activities don’t conflict with our policy on virtual/cryptocurrencies.”

Amidst calls for improvement from the market the ECB is continuing the development of its own CBDC, first announced by member of the executive board Benoît Coeuré on November 26.

“Prospects of central bank initiatives, however, should neither discourage nor crowd out private market-led solutions for fast and efficient retail payments in the euro area,” said the ECB in a December paper.

This stance was expanded upon by ECB president Christine Lagarde yesterday in an interview for French magazine Challenges. “We are looking closely into the feasibility and merits of a CBDC, also because it could have major implications for the financial sector and for the transmission of monetary policy,” said Lagarde.

Several countries have discussed the possibility of implementing a CBDC, including China and Sweden. The Bank of England is not planning to create a CBDC.

Related reading

Finance more evolution than revolutionary change